Taxi Tip Nudge

NYTimes: New York’s cabbies howled when the city began forcing them to take credit cards. Some even went on strike, calling the requirements a kowtow to tourists and a burden on drivers.

But two years later, the back-of-the-cab swipe has emerged as an unlikely savior for New York’s taxi industry, even as other cities’ fleets struggle to find fares in a deep recession.

The saving grace appears to be a simple nudge. Before the credit card swipe system the average tip was around 10% but the computer offers three tip sizes 30%, 25%, 20% and the average tip has now risen to 18-22%!

Joshua Gross estimates, that this simple nudge has increased the income of taxi drivers by $144 milion per year. Had the drivers demanded this increase via an increase in rates it probably never would have happened.

“The higher tips are tempered by a 5 percent service fee applied to fares that are paid with plastic. Drivers must also wait anywhere from a day to a week to retrieve their fare money paid by credit cards, and they said the machines occasionally break down, resulting in lost fares.”

Who does this 5% fee go to?

And I assume a similar phenomenon, a few decades earlier, resulted in higher tip income for servers in restaurants?

I was at a restaurant recently where the credit card statement included, as one of the cost items, a 20% tip (this was for a small party). Then a subtotal, including the tip amount. Then, below that, a line titled something like “additional tip.” I wonder how many people at that restaurant just glance quickly at the subtotal and add 15% tip on top, leading to effectively double tipping.

With fare regulation, rising gas prices, and the costs for a driver of getting access to a taxi medallion, they don’t necessarily make out particularly well, and may end up working at sub-minimum-wage rates.

Many drivers do not own their own medallions. Rather, they drive for fleets that own the cars, and thus the medallions. Owners frequently treat them pretty poorly, including imposing extra charges on the drivers. A recent investigation has led the taxi and limousine commission to revise new rules to make it easier to report and correct unfair practices imposed on drivers.

Auto salesman: Hi! can I help you?
Customer, yes, I hope so. I’m tired of paying $30 for a 15 minute ride because I think it cost me way too much.
What do you have to offer? I figure I can afford $100/week, including taxes, fuel, parking fees.
Auto salesman: sorry, we only sell cars; the Wal-Mart is down the street. They sell cheap shoes and bicycles.

In other words, poor people who are too stupid to stumble on to a used car lot? Anyways, there are also other options. I’ve spent years of my life at a stretch carless and I’ve never been tempted to take cabs.

You can tip 10% (or 0%) but you have to type it in manually. The 20/25/30% buttons are preset.

I wonder to what extent this is offset by the drivers suddenly having to declare 100% of their tips for tax purposes. Hell, I wonder to what extent this is *explained* by the drivers suddenly having to declare 100% of their tips for tax purposes.

Depending on their reported taxable income, this may be beneficial for them as the EIC is a negative income tax until (I think) the mid $40k’s for married couples with 2 kids. I’m a nosy fare; always talking to my cabbies– many have great immigration stories here in Chicago– and most do something else non-taxable on the side. I’ll be interested to see Uber’s effects. I love it. The cabbies seem reaction seems lukewarm.

Yes! The IRS has a formula, or set of formula’s they use to estimate what your take home was. The first thing the veteran servers expound upon during your first break is the many “IRS gotcha” stories that do the rounds.

But wait! That’ll result in people charging whatever the market will bear, with all manner of vehicles able to be hired! And anyone will be able to drive a cab or limo. And if we’re not careful, we’ll have hired cars competing with busses, and possibly even using the same routes!

A proposal to extend medallion cabs to the boroughs other than Manhattan met with fierce resistance from the current medallion owners, who sued, claiming (in very simple terms) that it was unconstitutional to increase the number of medallions and that the value of their medallions would drop. Of course, the purpose of auctioning off these new medallions was to raise funds for the city.

This is less a nudge and more sneaky User Interface design. I suspect many customers don’t even realize they can type in a tip manually. They probably assume that they must choose from these three presets or zero.

That’s a valid nudge. Just like the opt-out 401k, many probably don’t even realize one of the deductions on their paycheck goes into an account for them and isn’t just another tax item. Or the menu that lists healthy stuff but allows you to order non-healthy versions not listed.

Don’t think it is a nudge – people taking taxis have already revealed that their opportunity cost of time is quite high – the difference between hitting a button and thinking about/typing in a different amount is non-negligible. So we’re presenting people with two quite different baskets – one with a low tip which takes more time, and one with a high tip which wastes less time.

The (meaningful) definition of a nudge is that it is in the interest of the person being nudged. Not just deemed good for them, that is just nanny-statism. It is something they would in fact voluntarily choose but for the hurdles to rationality of real life.

“At the end of last year, about one-fifth of cab rides were being paid for with a card.”

So a better estimate is ~$26 Million income increase via tips. Not $144 Million.

Though, it is reasonable that a higher proportion of plastic gets used on longer rides. So the $26 Million estimate might be a bit low; but the tip increase is definitely nowhere close to $146 Million as estimated by Joshua Gross.

No mention of marginal tax rates? Cash tips are (I’ve heard) frequently not reported as income, but credit card tips are. A $10 taxi ride with a $1 cash tip means $1 in the driver’s pocket. A $10 taxi ride with a $2 credit card tip means maybe $1.75 in the driver’s pocket. Add to that any phase-outs that occur because of the extra $2 in AGI and perhaps the $1.75 becomes $1.50. A person who was skeptical about government’s ability to spend money wisely might say that $0.50 of wealth has just been destroyed: we could have had $2 in cash floating around out there, but now we only have $1.50.

@Ricardo, your “skeptic about the government’s ability to spend money wisely” is apparently assuming that 100% of government spending is wasted. I would categorize such a person as an anarchist or conspiracy theorist.

Disagree that this is a “nudge.” “Nudge,” as Sunstein uses it, means subtly influencing people to do things *for their own good* (ie, 401ks) or at least *for the general good* (ie, organ donation). Here, the passengers are just being “nudged” to pay higher prices. This is clearly not in the benefit of the passenger, and I am unconvinced that increased tips to taxi drivers serve some higher societal purpose.

I agree with whoever posted that this is the effective equivalent of a high-pressure sales tactic, albeit a subtle one. Somewhat akin to grocery stores putting more expensive items at eye level.

Why is this a “nudge”? Based on what you’ve told us, the choice set has been reduced to four: 0, 20, 25 30. I thought “nudging” was about changing the default (but leaving the person free to make their originial choice — 10%, on average, according to your post). Here, you’ve taken the original choice off the table. So customers now gravitate to the next closest non-zero number. I don’t see how this vindicates the “behavioralist” explanation at all.

The way Sunstein presents ‘Nudges’ in his book, the point is to nudge people to make decisions in their own interest (as others have argued.) That’s not what is happening here.

It’s more accurate to refer to this as an illustration of the power of anchoring/framing.

Marketing people have been employing tactics lke this for a long time. Based on the taxi example, it looks like a powerful means of affecting behavior.

At the end of the day, I’m thinking Uncle Sam comes out ahead, taxi passengers pay more, and taxi drivers’ post-tax income prolly reverts to something like its previous level, as wages are bid down/medallion prices are bid up.

There’s a bit more to the dynamic. I’m more familiar with Boston as a visitor for business, where it goes like this:

– Cabs are required by law to accept credit cards and all cabs have swipe machines
– Drivers will drive you somewhere then suggest the card machine doesn’t work because a) they get hit for a percentage and b) there is a delay before they have hands on the payment (48 hours I think as of last year?)
– This interaction is profoundly uncomfortable, especially for business travellers.
– For their part, business travellers almost universally prefer to swipe because expensing random cash amounts is a PITA
– So, at the end of the ride there was a showdown with the customer feeling misled and less willing to tip and the cabby feeling and often expressing class discomfort where mostly better off people are too lazy to carry cash even if it helps the less fortunate immigrant driver out.
– Enter the machines that pre-select 20%, 30%, etc. instead of the 10% people were used to. The new equilibrium is the driver will announce some preference for cash or complain about hard times created by cards and the business traveller will be more than happy to hit the 20% button to quickly end the awkwardness and the company is taking care of the tip anyway.

In Boston it is illegal to operate a cab with a broken swipe machine. If they get you to your destination and say it’s broken – just remind them it was illegal to pick you up with a broken machine. If they raise a fuss call the police.

The EIC throws a monkey wrench into that at low income levels. Of course when you start phasing out EIC benefits, the effective tax rate shoots up. A tax system with inflection points in the marginal rate curve is ripe for fraud.

What I want to know is who was tipping low enough to make a 10% average? I’ve never tipped anything less than 15% on a cab ride >$10 in NY and that’s including when I was a broke college student. I guess I’ve been brainwashed into being a good tipper.

That said, my favorite taxi cab system (though not in terms of driving; god, they’re terrible drivers) is in Shanghai. You get a transport card, fill it up, tap the card on the touchless pad to pay when you arrive at your destination – no tip and the entire payment process takes literally under 5 seconds unless you want a receipt, which takes another 10 seconds to print out. Plus, you can use that transport card on the buses and the ever increasing number of subway lines. At some point, I’m sure you’ll be able to use it to pay for purchases in convenience stores like you already can in Japan.

Coming from a non tipping culture it had never really occurred to me to tip taxi drivers (we don’t in Australia although you’d normally round up the fare to the nearest convenient dollar unless it’s a business expense) but if I had it would have been 10%. Good thing I read this article before heading to Seppoland. Is there any service you don’t tip for? What would be the principal exceptions? Fast food places or do you tip there as well?

I’m not sure there are any exceptions any more. The coffee cart where I work has a tip jar conspicuously displayed… at a place where you grab your own cup, then fill it and cap it yourself. Quite literally the only personal service received is the hand that is stuck out to take your payment.

I’ll tip a traditional amount in the traditional circumstances. But I would not be surprised if the servers and bellhops complaining about cheapskates are really dealing with the consequences of every damn person and their dog acting as though they deserve a gratuity.

Similarly, technologies like Uber might result in better wages for actual cab drivers, since they would no longer be in hock to a cab company for the use of a medallion, which costs around $700,000. The medallion system may hold down supply but it doesn’t enrich the lowly drivers. It enriches the owners of the medallions, which are mostly held by large companies.

Taxi drivers were really, really stupid or misinformed to oppose credit cards. Practically everybody knows that people spend more when they can use a credit card.
The question “cui bono” always occurs to me in situations like this: if you want to know who is behind something, consider who stands to gain. The drivers are better off, the owners are better off, the credit card companies are better off, and the riders are better off. Who am I leaving out? Who is hurt by credit card use in cabs that might reasonably object to it? Somebody help me out here…

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